Jeffrey D. Sadow is an associate professor of political science at Louisiana State University Shreveport. If you're an elected official, political operative or anyone else upset at his views, don't go bothering LSUS or LSU System officials about that because these are his own views solely.
This publishes Sunday through Thursday with the exception of 7 holidays. Also check out his Louisiana Legislature Log especially during legislative sessions (in "Louisiana Politics Blog Roll" below).

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27.12.12

Going over cliff brings some benefits to LA fiscal house

Hopes have dimmed considerably that the federal government will address
the “fiscal cliff,” or the combination of tax increases and spending cuts
created by last year’s budget deal among Democrat Pres. Barack Obama,
a Democrat-led Senate, and a Republican-led House, before the Dec. 31 deadline,
after which those go into effect. And that may turn out as a net benefit to
Louisiana, at least as far as the direct impact of individual income tax
changes.

Some have wailed and gnashed their teeth over the prospect. One estimate
argues that the deal would cost the state 28,000 jobs as taxes go up on just
about everybody and federal spending is curtailed. In addition, as federal
income taxes may be written off from those for the state, an increase in those
means less revenue for Louisiana.

Other complain
that the impending changes will affect the poor negatively, especially in that Louisiana
ties its earned income tax credit and child care tax credit breaks to the
presence of the federal ones, which would go away. The former affects only the
lowest income earners, while the latter allows disproportionately more money to
stay in the pockets of the lower earners and subsidizes a special interest
industry.

But when those same forces voice the discredited
shibboleth that, contrary to and the reverse in reality, damage will occur because “Louisiana
has a revenue problem, not a spending problem,” you know these claims cannot be
taken for face value and deserve genuine investigation. And when doing so, there’s
a pretty good argument that both in terms of future economic activity in Louisiana
and as far as current state fiscal status go, Louisiana may be better off.

Viewing the three major changes – decreased state revenue due to more
federal income taxes, being written off, increased state revenue with far
smaller EITC and child care tax credits – predicted changes in these alone will
give the state more money. The two credits in 2010-11
cost the state over $62 million, nearly three-quarters of which was the EITC
(the second-highest of all, behind only the notorious Motion Picture Investor
Credit). Other smaller individual changes would capture $2 million more.

The impact of the paying of increased federal individual income taxes is
harder to estimate. In 2010-11,
the total size of the deduction – the state’s largest – was $690 million, and
would go higher. Roughly, the number of filers in Louisiana can be multiplied
by what the left-of-center Tax
Policy Center thinks the average increase in total taxes paid, $2,000, for
the $40,000-65,000 bracket, in which lies the median Louisiana family income,
minus the non-federal income tax portion of that, estimated at about two- thirds
of the total increased bite, times the average marginal rate in Louisiana of
2.3 percent, and excluding the six percent of returns that pay no state income
taxes. This computes to an extra $26.8 million.

Being that the EITC will decrease by 90 percent in state distributions
to its filers, the savings there is half again what savings state taxpayers
will realize by the increased deductions. In all, as far as the individual
income tax-related components of the “cliff” are concerned, Louisiana’s net
change to state finances will be an increase of almost $23 million.

There is one other income-tax related component, certain deductions
that would disappear from corporate income tax rates, and would only add to
that $23 million increase to state coffers – which represents about an eighth of the entire
2010-11 corporate income tax take in Louisiana – making the state a net winner
with this aspect of the going over the “cliff.” Of course, there is the much
broader and bigger picture of all the other components to it that do not
directly involve state finances, but which indirectly will serve to put a drag
on the economy that, in the short run, likely make this a net negative exercise
to state finances in that time frame.

And over the long term, even with some short-term pain, both the
national and state economic situations will be better off by broadening the tax
base, which is the most reliable way to stimulate economic growth that benefits
all. Even with the increase in marginal rates causing income tax increases for
all but the lower earners, dramatically scaling back the EITC and, to a lesser
extent, the child care credit, will capture many of these folks as well.

While the economic
benefits from tax base broadening are well known, there also is a
philosophical/moral benefit as well. By having more people become contributors
to the running of government, this does a better job of distinguishing the
deserving from non-deserving poor that is fairer to the net payers of the
system, and the increased investment of those others who become payers as a
result in the system will sharpen their sensitivity and commitment to
contemplating and making policy choices on the basis of what benefits the
whole, rather than what helps the special interests tied into discrete tax
exceptions.

Naturally, Louisiana could produce the same by changing, including by unlinking,
these two credits, which may be an outcome of the Revenue Study Commission. But without
any of that action, it still may happen by going over the “cliff.” Thus, to
achieve saner state individual income tax policy in the long term, as well as
to reduce state spending Louisianans should not fear taking a tumble, although
at the expense of short-term national economic contraction and personal
sacrifice.